Future debate on monetary policy
It seems like the graph below is spreading in the econ-blogosphere. I took it from here. You can also see it here and here. The idea is simple: the US is falling into deflation like Japan.
Yup. It could be.
One might wonder how to avoid deflation, the worst case scenario for all policy makers in the current world. According to the Federal Reserve Act, the Board of Governors and the Federal Open Market Committee should seek "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." So, the Fed is expected to act against deflation in the US. But should disinflation go on or turn to deflation, discussion would be sharply divided by two on how to do with monetary policy. I call the two "Enough" and "Not enough."
"Enough" camp refers to those who think that monetary policy isn't effective to combat deflation. Most central bankers would belong to this group if they see deflation entrenched despite every policy they make. Central bankers contrive some policy action more often than not at a monetary policy meeting, but they admit that it's no use to relieve the pain. Monetary policy would gradually turn to an excuse for dodging criticism from the parliament which is worried about reelection. They think that fiscal policy or structural reform or combination of both should be much more conductive to shore up the economy. Some of this camp preach more radical reforms like "Any monetary or fiscal policy won't work. Complete restructuring of the whole economy is the only way to survive." But it's not so many.
"Not enough" people are likely to regard deflation as the result of hesitation or inaction by central bankers which they think should give priority to price stability. Analysts or economists in private institutions would be eager to join this group. Whenever central bankers move, they think that it's not enough to root out deflation. Unless deflation is out of sight, they keep saying "It's not enough!", and accusing central bankers of their inertia or even lack of knowledge in basic economics. This group wants central bankers to buy every financial assets, no matter which is stocks, bonds, or REIT, and to degrade central bank's assets. One of the characters of this circle is to almost deny the independence of central banking and to promote the integration of monetary and fiscal policy.
Which party would you think you join?
Yup. It could be.
One might wonder how to avoid deflation, the worst case scenario for all policy makers in the current world. According to the Federal Reserve Act, the Board of Governors and the Federal Open Market Committee should seek "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." So, the Fed is expected to act against deflation in the US. But should disinflation go on or turn to deflation, discussion would be sharply divided by two on how to do with monetary policy. I call the two "Enough" and "Not enough."
"Enough" camp refers to those who think that monetary policy isn't effective to combat deflation. Most central bankers would belong to this group if they see deflation entrenched despite every policy they make. Central bankers contrive some policy action more often than not at a monetary policy meeting, but they admit that it's no use to relieve the pain. Monetary policy would gradually turn to an excuse for dodging criticism from the parliament which is worried about reelection. They think that fiscal policy or structural reform or combination of both should be much more conductive to shore up the economy. Some of this camp preach more radical reforms like "Any monetary or fiscal policy won't work. Complete restructuring of the whole economy is the only way to survive." But it's not so many.
"Not enough" people are likely to regard deflation as the result of hesitation or inaction by central bankers which they think should give priority to price stability. Analysts or economists in private institutions would be eager to join this group. Whenever central bankers move, they think that it's not enough to root out deflation. Unless deflation is out of sight, they keep saying "It's not enough!", and accusing central bankers of their inertia or even lack of knowledge in basic economics. This group wants central bankers to buy every financial assets, no matter which is stocks, bonds, or REIT, and to degrade central bank's assets. One of the characters of this circle is to almost deny the independence of central banking and to promote the integration of monetary and fiscal policy.
Which party would you think you join?
posted by Akihiro Gotoda at
9:46 PM
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